Last Updated Mar 11, 2010 9:44 PM EST
Devon will buy a 50 percent stake in BP's undeveloped Kirby oil sands project for $500 million and will pay an additional $150 million to cover initial capital costs. The Kirby oil sands sale is just a small part of a $7 billion deal announced Thursday between the two companies. BP is buying the majority of Devon's offshore assets in the Gulf of Mexico, Brazil and the Caspian Sea.
Yes, BP is getting rid of half of its stake in Kirby. But Devon, considered one of the most successful oil sands operators, will ensure the long dormant project will get started. And for some BP shareholders, this is bad news. A coalition of BP shareholders has already filed a resolution ahead of the April 15 annual meeting to review the risk of the company's Sunrise oil sands project with Husky Energy. BP's venture with Devon to develop Kirby will only add to some shareholders' concerns.
The deal itself is a good fit for BP and Devon. BP owns 90,000 acres in Kirby, which just happens to be neighbors with Jackfish, a Devon-operated oil sands development that started production in 2007. And Devon has experience with in situ development, a method used to produce oil at Jackfish and the likely approach for Kirby.
Typically, oil sands are mined by scrapping the ground clean and then scooping up the bitumen -- a sticky low-grade crude oil -- using massive trucks. The bitumen is then refined or upgraded into high quality crude oil. But instead of mining the sands, in situ developers use a thermal technology known as steam-assisted gravity drainage to pump steam into the ground and loosen the bitumen so it can flow through a networks of wells.
BP has even managed to find a long-term client for its heavy crude refinery in Whiting, Indiana. As part of the deal, heavy crude produced at Kirby and from some of Devon's other oil sands assets will be refined at BP's Whiting facility, which is undergoing an upgrade to expand its capacity. In short, this means that BP has a secure source of Canadian heavy oil.
BP's not the only winner in this. Kirby is a greater resources than its Jackfish development with an estimated 1.5 billion barrels of risked resource potential, Dave Hager, Devon's vice president of exploration and production, said during a Web cast announcing the deal Thursday. So, how quickly will this project get off the ground? Somewhere around six years before the first phase would be producing oil. That may seem like glacial pace, but in oil sands years, it's a flash.
Photo of equipment used in traditional oil sands mining from Flickr user species_snob, CC 2.0